Subrogating Major Flood Losses: An Act of God or Human Error?

Myth, Meteorology and Mea Culpa

Evaluating claims for subrogation potential is a delicate business. Successfully proving and quantifying damages in court is trickier still. As subrogation attorneys and claims adjusters will attest, doing so often requires a sizeable investment in terms of both time and resources.

While the onus for the insurer and its chosen counsel are great, the potential reward can be reclaiming millions of dollars. After the cause and circumstances of a loss have been investigated and determined, the insurer's counsel must take great care in vetting experts and appropriate technologies to succinctly relay the findings to compel a fair judgment at trial.

The recent $3.4 million victory in U.S. Fire Insurance Company v. Omnova Solutions, Inc., a complex flood case that many had deemed “unwinnable,” illustrates the importance of selecting the right experts and technology to prove damages in court. In the article below, Peter G. Rossi, the subrogation attorney who secured the unanimous verdict, discusses the broader implications for the industry, acts of God, and the '200-year storm' that wasn’t.

Before delving into the nuances of handling flood claims, let's examine some case specifics and how Rossi and his team convinced a jury of eight to rule in favor of their client, Crum & Forster (U.S. Fire Insurance Co.).

A Manufacturing Legacy

The case involved a flooding claim by Crum & Forster, whose insured, Mafcote, manufactures cardboard boxes for national retail stores. The defendant, Omnova Solutions, Inc., manufactures vinyl products. Both companies are located on the banks of Brush Creek in Jeannette, Pennsylvania, with Omnova situated about 350 feet downstream from Mafcote.

The Omnova facility has occupied the space since 1915, first as the General Tire and Rubber plant (GT); then as GenCorp; and finally as GenCorp spin-off Omnova. In 1974, General Tire constructed a new building over Brush Creek, which necessitated building a culvert under the structure. General Tire obtained the proper approvals for the building and the culvert, including a permit from the Pennsylvania Department of Natural Resources. However, the permit was for a culvert measuring 43 feet wide and 7 feet tall.

Rossi and his legal team contended the culvert was undersized, using data prepared by the defendant’s experts to prove it. The gist of the argument there was the insufficient size of the culvert caused it to become obstructed, thereby flooding the Mafcote property.

Acts of God

The defense countered that the flood was caused by an 'act of God,' as Jeannette suffered one of the largest rain storms in its history and obstructions downstream from Omnova. Almost 3.5 inches of rain fell in 3 hours on the day of the flood, the defense continued, characterizing the weather pattern as a 200-year rainstorm. An AccuWeather meteorologist was among those testifying that the storm was as catastrophic as the defense was depicting.

However, Rossi and his team called on two local witnesses who said that although the storm was indeed large, there had been prior storms of similar magnitude in the area. Moreover, the Mafcote facility had never flooded until 2009, when the Omnova culvert became obstructed. Mafcote reported 18 inches of water in the factory as a result. Rossi’s theory was that the undersized culvert collected debris, in turn causing water to back up the creek.

Evidence presented by the defense indicated the culvert was cleaned on an annual and as-needed basis. But Rossi presented evidence challenging this assertion. He showed pictures of debris in the culvert immediately after the flood to indicate it was obstructed. Rossi and his team then focused on the design and construction claim, ultimately winning the case.

Central to the case was a costly computerized model, which Rossi used in his opening argument. Here, Rossi talks about other components that helped ensure success in the multi-million dollar subrogation action and what P&C insurers can learn about handling flood claims.

Q: What are some key takeaways from U.S. Fire Insurance Company v. Omnova Solutions, Inc. in regard to due diligence in subrogation actions and claims investigation?

A: You’ll never know until you try! The only way to understand the causes and effects of a flood is to conduct a proper investigation and evaluate the details. This does not ensure that you will win every case but it will ensure that you are leveraging the law of averages in your favor; you are identifying and pursuing the viable cases and promptly closing the non-productive cases. This is especially true for flood cases. Flood cases are subtle and might appear to be futile because of heavy rain or deep flood water, however some cases might have potential after an engineer or hydrologist reviews. Reference to Act of God and hundred or thousand-year storms and floods are conclusions that are interesting, but irrelevant.

Typically a potentially responsible third party will claim that an event was an Act of God which could not have been prevented. Often this is true but not always. If a culvert, bridge or stream bed is designed to carry a 500-year storm, then a 100-year storm should not cause a flood. If it does, then something went wrong. Perhaps a design problem or something else caused a small storm to behave like a bigger storm; a downstream blockage or an upstream dam failure or release. Or, if a flood wall is designed to protect a property from 500-year floods and 200-year storm floods the property, then something is wrong and there might be subrogation potential. The 'Act of God' defense requires there is absolutely no human intervention or causation in the event. It must be an exclusive Act of God. If the flood was the result of the combined effects of nature and man then there may be subrogation potential. In any significant flood case, the costs associated with a professional investigation are justified by the potential for a recovery.

Q: In your opinion, does this judgment carry larger implications for the industry?

A: Maybe for the liability side of the house. Flood cases involve sophisticated legal and technical issues and are very expensive to litigate. The fact of a major rain storm should not preclude settlement discussions nor does it mean that a jury will necessarily find for the defense. In this case there were no meaningful settlement discussions and there should have been. The defense and the liability carriers were convinced that images of flooded streets and waves of water would convince the jury that this was an unpredictable unpreventable Act of God. For the P&C carriers, it reinforces the idea that a disciplined approach to subrogation cases in general and flood cases in particular pays dividends. At the outset this case did not appear to be viable. Local news reports claimed that this was the “storm of the century.” But after the lawyers and experts evaluated the storm and flood, the subrogated carrier saw the potential. The storm was not as big as first thought and previous similar storms did not cause floods at the insured property. Experts who can analyze floods are necessary to give the industry insight into these cases. According to FEMA the average annual U.S. flood losses in the past 10 years (2002-2011) were more than $2.9 billion. Floods are big business. They cause devastating damages, disrupt communities and lives. Juries are sophisticated and, when educated in the proper case, are not unduly influenced by photographs of swirling, rushing waves of water and will consider potential human involvement.

Q: Tell us about vetting experts for this case. How crucial were they in winning, and in subrogation cases specifically?

A: A flood case requires expert advice and testimony. We use experts that we share mutual respect and trust with. They know we will not ask them to do or say things that they don’t believe in and vice versa. A reliable expert can help separate viable subrogation cases from those that should be closed so that resources are not wasted. Frivolous flood cases are too complicated, expensive and time consuming. Our flood experts are trial and litigation tested. The best experts combine strong academic credentials with practical, problem solving skills. Above all they must be able to educate non-scientist judges and juries regarding the nuances of floods. They must guide the fact finder through what appears to be a natural disaster to evaluate potential human intervention. In any trial, the jury must trust the lawyers and experts. This is especially true in flood cases because of the extensive use of experts and the complexity of the issues. Most flood trials involve facts regarding the location, depth and movement of water. Usually there are at least two versions of these facts and the jury tends to believe the factual version offered by the expert they trust. If an expert is evasive or hesitant or in any way appears to be hiding or shading the truth the jury will not believe him. And once an expert has lost the jury’s trust it affects every decision the jury makes regarding his testimony.

A typical flood case needs the expertise of a hydrologist and/or a hydraulics expert and possibly a weather expert or meteorologist (in addition to damage experts all subrogation cases require). It is essential to understand and explain how much rain fell over what time period, how it was distributed and transported through the watershed and impediments to the free flow of the water.

The government has studied waterways and watersheds and prepared thousands of Flood Insurance Studies and Rate Maps for thousands of communities. Based upon this information, we can predict how a rain storm should affect a waterway. If the water is deeper than expected then something may have changed or something besides rain may have affected the water’s depth. The hydrologist was important in this case as he was able to explain how much rain fell and when and how water levels at one location affected the levels in other places. He was also able to apply sophisticated mathematical hydraulic models to illustrate how culvert dimensions affect water levels and flow. We also used a computerized graphic which depicted the creek and adjacent properties with actual photos of the flood damage and conditions along the creek. This gave the jury a perspective and understanding of how things were related and what caused the flood. In this particular case the water backed up stream which is counterintuitive as water typically does not run uphill. The graphic helped us demonstrate how and where the backup occurred.

Q: What was the significance in proving this was, in fact, not a '200-year rainstorm'?

A: The size of a particular storm has several implications for flood litigation. The Act of God defense requires a large, unpredictable storm. The size of a storm also dictates the expected flow in the creeks and rivers and allows the experts to predict the surrounding water levels; bigger storms create more flow and higher water levels. Often there is no physical evidence regarding water levels and mathematical models must be used to approximate the conditions at the time of the flood. The experts can extrapolate general conclusions from limited known conditions regarding water levels, flow or rain fall.

The Act of God defense assumes that plaintiff’s damage was caused by the flood but the storm was so big, unpredictable and uncontrollable that the defendant could not have prevented the damage. Plaintiff usually argues that the storm was not so big, unpredictable or uncontrollable and that the defendant’s negligence in combination with the storm caused the flood. The categorization of a storm or a flood as a particular annual “return period,” 100, 200, 500 years, etc. is misleading. It does not mean that the storm or flood is to be expected every so often but is a mathematical calculation or probability of such a strom occurring. If the parties get into a legitimate dispute about the size of a storm then the plaintiff has probably succeeded in casting doubt on the storm’s size.

On the other hand, if there is irrefutable evidence regarding the size of the storm then plaintiff’s approach will be different. In this case, the defense was two-fold; that this was a large uncontrollable storm that was an Act of God and the flood was caused by stream obstructions unrelated to the defendant’s property. This is a difficult position; either a storm and flood is an Act of God or it was caused by stream blockage. It is very difficult to ask a jury to evaluate a flood as an Act of God and on an alternative cause theory.

While the defense did present expert metreoroligical evidence that this was probably a 200-year storm, the plaintiff’s expert and other defense experts previously said that this was not such a large storm. The plaintiff also presented convincing anecdotal non-expert testimony from local people who said that there had been other storms as large as this one. Notwithstanding these other large storms, plaintiff’s insured’s property never flooded until the defendant’s culvert became obstructed. The jury was not convinced that this was an unpredictable Act of God nor did they believe that the volume of water was as claimed by the defense.

Peter G. Rossi is a member in the Philadelphia, Penn. office of Cozen O’Connor’s subrogation and recovery department. He may be reached at prossi@cozen.com.